Returning to the Farm 2005

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Returning to the Returning to the Farm 2005 Farm 2005 Nebraska Farm Business, Nebraska Farm Business, Inc. Inc. Tina Barrett – Executive Tina Barrett – Executive Director Director

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Returning to the Farm 2005. Nebraska Farm Business, Inc. Tina Barrett – Executive Director. Nebraska Farm Business, Inc. Services We Offer: Tax Planning Tax Preparation W-2/1099 Preparation Monthly Accounting Payroll Business Planning Financial Analysis. Nebraska Farm Business, Inc. - PowerPoint PPT Presentation

Transcript of Returning to the Farm 2005

Page 1: Returning to the Farm 2005

Returning to the Farm Returning to the Farm 20052005

Nebraska Farm Business, Inc.Nebraska Farm Business, Inc.

Tina Barrett – Executive DirectorTina Barrett – Executive Director

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Nebraska Farm Business, Inc.Nebraska Farm Business, Inc.

Services We Offer:Services We Offer: Tax PlanningTax Planning Tax PreparationTax Preparation W-2/1099 PreparationW-2/1099 Preparation Monthly AccountingMonthly Accounting PayrollPayroll Business PlanningBusiness Planning Financial AnalysisFinancial Analysis

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Nebraska Farm Business, Inc.Nebraska Farm Business, Inc.

Our Averages Data Is Our Averages Data Is Published and Published and Distributed to Distributed to Lenders, Senators, Lenders, Senators, Educators, Farmers & Educators, Farmers & More.More.

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Net Farm Income TrendNet Farm Income Trend

-$20,000

$0

$20,000

$40,000

$60,000

$80,000

$100,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2004 New Record NFI:2004 New Record NFI:

$78,930$78,930

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NFI vs. Family Living TrendNFI vs. Family Living Trend

-$20,000

$0

$20,000

$40,000

$60,000

$80,000

$100,000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Net Farm Income Family Living

2004 Family Living Expense: $44,811 (Avg. of 145 Farms)

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Net Farm Inc. vs Gov’t PmtsNet Farm Inc. vs Gov’t Pmts

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Net Farm Income Gov't Pmts

1998-2001 – Government Payments Exceed Net Farm Income

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Net Farm Income vs. TaxesNet Farm Income vs. Taxes

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000

Net Farm Income Taxes

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Net Return Per Acre TrendNet Return Per Acre Trend

-$80

-$60

-$40

-$20

$0

$20

$40

$60

93 94 95 96 97 98 99 '00 '01 '02 '03 '04

Irrigated Corn, Nebraska Trend

Net Return Per Acre, Including Labor & Management Charge.

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So you think….So you think….

““All good things come All good things come to those who wait”to those who wait”

Just try not filing your tax Just try not filing your tax return, and see all the “good” return, and see all the “good” things the IRS has waiting for things the IRS has waiting for

you!you!

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Returning to the FarmReturning to the Farm

Things to think about first:Things to think about first: Do you want to farm together or farm together Do you want to farm together or farm together

separately?separately?• Do you want to make management decisions Do you want to make management decisions

together or on your own?together or on your own?• Will you share equipment or have separate lines?Will you share equipment or have separate lines?• Are you willing to risk financial stability of older Are you willing to risk financial stability of older

operations with a new addition?operations with a new addition?

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Returning to the FarmReturning to the Farm

If you will farm together:If you will farm together: What entity will you choose?What entity will you choose? How will the labor and management be split?How will the labor and management be split? How will estate planning effect both farm and How will estate planning effect both farm and

non-farm heirs?non-farm heirs? Will government payment limitations be a Will government payment limitations be a

problem?problem?

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Returning to the FarmReturning to the Farm

If you will farm together If you will farm together separately:separately: What entities will you What entities will you

choose?choose? How will labor be shared?How will labor be shared? How will equipment be How will equipment be

shared?shared? Will the farm-heirs be able Will the farm-heirs be able

to survive alone with the to survive alone with the estate planning in place?estate planning in place?

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Entity SelectionEntity Selection

Reasons for EntitiesReasons for Entities

1.1. Estate PlanningEstate Planning

2.2. Business Business SuccessionSuccession

3.3. Income TaxIncome Tax

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Estate PlanningEstate Planning

Maintain Cash Flow & Maintain Cash Flow & Financial SecurityFinancial Security

Assure Equitable Split Assure Equitable Split of Assets Among All of Assets Among All HeirsHeirs

Minimize Estate Minimize Estate TaxesTaxes

Concerns of Concerns of Remarriage of Remarriage of Surviving SpouseSurviving Spouse

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Business SuccessionBusiness Succession

Team Approach to Team Approach to ManagementManagement

““Power” StrugglePower” Struggle Fair CompensationFair Compensation Expecting the Expecting the

UnexpectedUnexpected Phased-Out Phased-Out

RetirementRetirement

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Income TaxIncome Tax

Savings Are Possible Savings Are Possible With EntitiesWith Entities

Reduction in Self-Reduction in Self-Employment (SE) Employment (SE) GreatestGreatest

Tax Savings Come Tax Savings Come With Accounting With Accounting CostsCosts

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Choosing the Right EntityChoosing the Right Entity

Sole ProprietorSole Proprietor PartnershipPartnership LLC/LLPLLC/LLP S-CorporationS-Corporation C-CorporationC-Corporation

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Entity ComparisonEntity Comparison

SE Tax SE Tax SavingsSavings

Liability Liability Prot.Prot.

Fringe Fringe BenefitsBenefits

Succession/Succession/Estate Estate

BenefitsBenefits

Sole-Prop.Sole-Prop. NoNo NoNo SpouseSpouse NoNo

Part/LLCPart/LLC NoNo LLCLLC SpouseSpouse SomeSome

S-CorpS-Corp YesYes YesYes NoNo Yes & NoYes & No

C-CorpC-Corp YesYes YesYes YesYes Yes & NoYes & No

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Sample Farm Family PlanningSample Farm Family Planning

Jim and Jane Farmer Jim and Jane Farmer Want to Know if They Want to Know if They Should Have a Should Have a Different Entity than a Different Entity than a Sole Proprietor.Sole Proprietor.

They Have Two They Have Two Children and Do Not Children and Do Not Itemize.Itemize.

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Tax Savings By EntityTax Savings By Entity

Sole P.Sole P. Part.Part. S-CorpS-Corp C-CorpC-Corp

Farm Inc.Farm Inc. $50,000$50,000 $50,000$50,000 $25,000$25,000 $25,000$25,000

WageWage N/AN/A N/AN/A $25,000$25,000 $25,000$25,000

Inc. TaxInc. Tax $3,350$3,350 $3,350$3,350 $3,350$3,350 $3,970$3,970

SE TaxSE Tax $7,064$7,064 $7,064$7,064 $3,532$3,532 $3,532$3,532

Total TaxTotal Tax $10,414$10,414 $10,414$10,414 $6,882$6,882 $7,502$7,502

Ret. Earn.Ret. Earn. $25,000$25,000

Div. TaxDiv. Tax $1,250$1,250

Total TaxTotal Tax $8,752$8,752

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Tax Savings By EntityTax Savings By EntitySole P.Sole P. Part.Part. S-CorpS-Corp C-CorpC-Corp

Farm Inc.Farm Inc. $100,000$100,000 $100,000$100,000 $35,000$35,000 $35,000$35,000

WageWage N/AN/A N/AN/A $25,000$25,000 $25,000$25,000

RentRent N/AN/A N/AN/A $40,000$40,000 $40,000$40,000

Inc. TaxInc. Tax $12,630$12,630 $12,630$12,630 $12,630$12,630 $10,850$10,850

SE TaxSE Tax $13,659$13,659 $13,659$13,659 $3,532$3,532 $3,532$3,532

Total TaxTotal Tax $26,289$26,289 $26,289$26,289 $16,162$16,162 $14,382$14,382

Ret. Earn.Ret. Earn. $35,000$35,000

Div. TaxDiv. Tax $3,900$3,900

Total TaxTotal Tax $18,282$18,282

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Tax Savings By EntityTax Savings By EntitySole P. Part. S-Corp C-Corp

Farm Inc. $150,000 $150,000 $85,000 $50,000

Wage N/A N/A $25,000 $60,000

Rent N/A N/A $40,000 $40,000

Inc. Tax $25,348 $25,348 $25,348 $20,130

SE Tax $14,998 $14,998 $3,532 $8,478

Total Tax $40,346 $40,346 $28,880 $28,608

Ret. Earn. $50,000

Div. Tax $7,500

Total Tax $36,108

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Sample Farm Family PlanningSample Farm Family Planning

Why would you Why would you choose a C-Corp?choose a C-Corp? Remember, this Remember, this

example did not example did not include things like the include things like the deduction of:deduction of:

• Health Insurance,Health Insurance,• Medical Expenses,Medical Expenses,• Retirement Plans,Retirement Plans,• Other Fringe BenefitsOther Fringe Benefits

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Example of Savings from Example of Savings from BenefitsBenefits

Fringe Benefits:Fringe Benefits:1.1. Health Insurance - $10,000 / yearHealth Insurance - $10,000 / year

2.2. Medical/Prescription Costs - $4,500 / yearMedical/Prescription Costs - $4,500 / year

3.3. Retirement Plan - $3,000 / yearRetirement Plan - $3,000 / year

Total Benefits: $17,500 / yearTotal Benefits: $17,500 / year

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Tax Savings By EntityTax Savings By EntitySole P.Sole P. Part.Part. S-CorpS-Corp C-CorpC-Corp

Total Inc.Total Inc. $100,000$100,000 $100,000$100,000 $100,000$100,000 $100,000$100,000

BenefitsBenefits $0$0 $0$0 $0$0 $17,500$17,500

Adj. to Inc.Adj. to Inc. $13,000$13,000 $13,000$13,000 $13,000$13,000 $0$0

Inc. TaxInc. Tax $9,380$9,380 $9,380$9,380 $9,380$9,380 $8,225$8,225

SE TaxSE Tax $13,659$13,659 $13,659$13,659 $3,532$3,532 $3,532$3,532

Total TaxTotal Tax $26,854$26,854 $26,854$26,854 $16,727$16,727 $14,577$14,577

Ret. Earn.Ret. Earn. $35,000$35,000

Div. TaxDiv. Tax $3,900$3,900

Total TaxTotal Tax $18,477$18,477

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Tax Drawbacks to EntitiesTax Drawbacks to Entities

Loss of Step-Up in BasisLoss of Step-Up in Basis Machinery contributed to a corporation goes Machinery contributed to a corporation goes

in at your basis (No tax consequences)in at your basis (No tax consequences) Machinery in a corporation does not receive a Machinery in a corporation does not receive a

step-up in basis at the time of death, the stock step-up in basis at the time of death, the stock owned receives the step-up.owned receives the step-up.

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Tax Drawbacks to EntitiesTax Drawbacks to Entities

Loss of Step-Up in BasisLoss of Step-Up in Basis Example:Example:

FMV of Machinery = $500,000FMV of Machinery = $500,000 Basis in Machinery = $200,000 (Amount Remaining to Basis in Machinery = $200,000 (Amount Remaining to

Depreciate)Depreciate)

• If owned by individual at time of death, the If owned by individual at time of death, the surviving spouse inherits the machinery with a new surviving spouse inherits the machinery with a new basis = FMV and pays no tax upon the sale of basis = FMV and pays no tax upon the sale of assetsassets

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Tax Drawbacks to EntitiesTax Drawbacks to Entities

Loss of Step-Up in BasisLoss of Step-Up in Basis Example:Example:

FMV of Machinery = $500,000FMV of Machinery = $500,000 Basis in Machinery = $200,000 (Amount Remaining to Basis in Machinery = $200,000 (Amount Remaining to

Depreciate)Depreciate)

• If a corporation owns the machinery, it must pay If a corporation owns the machinery, it must pay tax on the sale of the assets and the individual tax on the sale of the assets and the individual must pay tax on the dividends to have use of the must pay tax on the dividends to have use of the cash.cash.

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Entities & FSAEntities & FSA

What Should You Keep In What Should You Keep In Mind Regarding FSA Mind Regarding FSA Payment Limitations:Payment Limitations: Sole-Proprietors each get Sole-Proprietors each get

payment limitspayment limits Partnerships look to the Partnerships look to the

number of partners number of partners S & C Corps are immediately S & C Corps are immediately

consolidated into consolidated into oneone payment limitation.payment limitation.

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Entities & FSAEntities & FSA

What Should You Keep In What Should You Keep In Mind Regarding FSA Mind Regarding FSA Payment Limitations:Payment Limitations: Payment Limitations Must Be Payment Limitations Must Be

Considered to Make Sure You Considered to Make Sure You Don’t Lose Payments!Don’t Lose Payments!

Or at least make sure the tax Or at least make sure the tax savings is worth losing the savings is worth losing the payments.payments.

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Entities & FSAEntities & FSA

Remember:Remember: The Entity Should Have The Entity Should Have

Significant Contribution of Significant Contribution of Active Personal ManagementActive Personal Management

And, It Should Not Exist Only And, It Should Not Exist Only To Receive More Payments To Receive More Payments (or to Avoid Tax)(or to Avoid Tax)

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Retirement SavingsRetirement Savings

With Reduced Social With Reduced Social Security Payments – Security Payments – There Are Reduced There Are Reduced Retirement BenefitsRetirement Benefits

What if Social What if Social Security Is Not Security Is Not Longer Available?Longer Available?

Saving on Own Is Saving on Own Is ImportantImportant

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Retirement SavingsRetirement Savings

What Would Happen What Would Happen If You Contribute ~¼ If You Contribute ~¼ of tax savings to of tax savings to Retirement Per Year Retirement Per Year (or $5,000)?(or $5,000)?

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Retirement SavingsRetirement Savings

25 30 35 40

Per Year Contribution $5,000 $5,000 $5,000 $5,000

Return 7% 7% 7% 7%

Total At 65 $1,068,048 $796,687 $546,091 $367,419

Per Year Income (20 yrs till 85)

$53,402 $39,834 $27,305 $18,371

* Still Have $12,377 Extra $’s * Still Have $12,377 Extra $’s For Reinvestment or Debt For Reinvestment or Debt ReductionReduction

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Retirement SavingsRetirement Savings

25 30 35 40

Per Year Contribution $10,000 $10,000 $10,000 $10,000

Return 7% 7% 7% 7%

Total At 65 $2,136,096 $1,593,374 $1,092,182 $734,838

Per Year Income (20 yrs till 85) $106,805 $79,668 $54,610 $36,742

* Still Have $7,377 Extra $’s For * Still Have $7,377 Extra $’s For Reinvestment or Debt Reinvestment or Debt ReductionReduction

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Successful Entity OrganizationSuccessful Entity Organization

C-Corp to Operate Farm

Individual/Land Owner

Corporation Get Extra 15% Tax Bracket,Corporation Get Extra 15% Tax Bracket, Individual Can Get All Medical, etc, Benefits Tax Individual Can Get All Medical, etc, Benefits Tax

FreeFree Individual Taxpayer Pays on Wage and Rent Individual Taxpayer Pays on Wage and Rent

Received.Received.

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Successful Entity OrganizationSuccessful Entity Organization

Partnership

Father Son

Partnership Can Own Machinery and Operate Partnership Can Own Machinery and Operate Farm.Farm.

Can Enter Partnership 80% - 20% and Switch Can Enter Partnership 80% - 20% and Switch Ownership Over Time,Ownership Over Time,

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Successful Entity OrganizationSuccessful Entity Organization

LLC To Own Machinery

Sole-Proprietor Sole-Proprietor

LLC Allows Shared Investment Of Machinery LLC Allows Shared Investment Of Machinery While Maintaining Separate Operations.While Maintaining Separate Operations.

Income Split Between IndividualsIncome Split Between Individuals

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Other Things to RememberOther Things to Remember

Adding Entities, Adds Adding Entities, Adds Bookwork,Bookwork,

Adding Entities also Adding Entities also Costs Money:Costs Money: Legal Fees to Set UpLegal Fees to Set Up Accounting Fees to Accounting Fees to

Prepare Tax ReturnsPrepare Tax Returns

Adding Payroll, etc. Adding Payroll, etc. Can Cause Can Cause HeadachesHeadaches!!

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Professional Cost of An EntityProfessional Cost of An Entity

CorporationsCorporations Part/LLC’sPart/LLC’s

Set Up Cost Set Up Cost $500-$1,000 $500-$500-$1,000 $500-$1,000$1,000

Business ReturnBusiness Return $500 $500 $400 $400

Each IndividualEach Individual $100 $100 $100 $100

Payroll FormsPayroll Forms $50 $50 N/A N/A* Does Not Include Tax Planning (+ ~$150), * Does Not Include Tax Planning (+ ~$150),

Accounting ($420 – 1Accounting ($420 – 1stst Set, $250 – 2 Set, $250 – 2ndnd Set)Set)

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Nebraska Farm Business, Inc.Nebraska Farm Business, Inc.

3815 Touzalin Ave3815 Touzalin Ave

Suite 105Suite 105

Lincoln, NE 68507-1600Lincoln, NE 68507-1600

(402) 464-NFBI(402) 464-NFBI

[email protected]@nfbi.net

www.nfbi.netwww.nfbi.net